Cereal giant Kellogg has received a negative outlook from the rating agency Standard & Poor’s (S&P) as commodity volatility and integration costs from its Pringles acquisition are expected to harm margins.

However, the Pringles buy is anticipated to help Kellogg diversify its portfolio in the long-term.

“This reflects our belief that we could lower the ratings if Kellogg is unable to reduce and sustain leverage below 3x by 2014.”

S&P warned that this could happen if Kellogg used excess cash for share repurchases rather than debt reduction.

The analysis comes from credit rating agency Standard & Poor's (S&P)

Kellogg’s adjusted debt stands at $9.3bn following the Pringles acquisition, said the rating agency.

Around 85% of the $2.7bn used to purchase Pringles was financed through debt.

S&P added that Kellogg was exposed to volatile commodity costs and competition was in slowing US cereal market, which could led to a downgrade if Kellogg is unable to achieve 2% sales growth and maintain profit margins in the mid to high teens.

“If the company made an additional sizeable acquisition, we would consider reviewing the issue-level ratings for a possible downgrade by one notch,” warned S&P.

Pringles potential

However the ratings agency does see potential for Kellogg through Pringles, which it acquired in February this year for $2.7bn from Procter & Gamble, after Diamond Foods’ bid collapsed.

“Pringles will somewhat improve the company's diversity and add operating scale to its international snack segment."

“We estimate that the company's international snack division will nearly triple in sales following the acquisition and international sales will increase to about 36% of combined company sales,” it said.

Kellogg acquired Pringles In Februaryfor $2.7bn from Procter & Gamble

Director of insight for Mintel Food and Drink Marcia Mogelonsky previously told this site that the Pringles deal would open up Asian markets for Kellogg.

But Euromonitor analyst Jared Koerten warned that by diversifying into the salty snacks market, Kellogg had entered a category dominated by Pepsico/Frito Lay.

Cereal giant Kellogg has received a negative outlook from the rating agency Standard & Poor’s (S&P) as commodity volatility and integration costs from its Pringles acquisition are expected to harm margins.